Question

How did the appreciation of the U.S. dollar and depreciation of the yuan affect the timing andmagnitude of the Asian currency crisis? What is moral hazard and how did it help cause the Asian currency crisis?

Answer 1

Answer:

1) Export Competitiveness

2) Moral hazard means lack of incentive to guard against risk where one is protected from its consequences.

3) Government guarantees

Explanation:

1) The appreciation of the U.S. dollar and depreciation of the yuan worked as a catalyst to speed up the Asian currency crisis as the exports were slowed down causing a decline in growth which also gives the motivation to the central bank to devalue their currency more in order to achieve export competitiveness to boost up the exports and economy.

2) The moral hazard in this case was the government guarantees, both implicit and explicit.

3) The moral hazard of government guarantees motivates the investors to invest taking risky adventures since regulations were also lenient, and finance was available. We see over investments backed by the inflated land prices. After that it was the final nail in the coffin when the local investors dump their local currencies in order to buy foreign currencies whereas foreign loans were no longer competitive.